🔶 Meaning of Accounting:
Accounting is the art of recording, classifying, summarising, and interpreting financial transactions to provide useful financial information for decision-making.
🔶 Features of Accounting:
- Identification of financial transactions – Only transactions measurable in money are recorded.
- Recording – Systematic record of transactions in journals and ledgers.
- Classifying – Grouping similar transactions under one head (e.g., Sales, Purchases).
- Summarising – Preparing Trial Balance, Trading Account, P&L A/c, Balance Sheet.
- Analyzing & Interpreting – Drawing meaningful conclusions.
- Communicating – Sharing financial reports with stakeholders.
🔶 Objectives of Accounting:
- Maintain systematic records
- Ascertain results of operations (Profit or Loss)
- Ascertain financial position (Assets, Liabilities)
- Assist in decision-making
- Comply with legal requirements
🔶 Advantages of Accounting:
- Helps in management decision-making
- Evidence in court
- Helps in tax assessment
- Facilitates loan approvals
- Assists in planning and budgeting
🔶 Limitations of Accounting:
- Only quantitative information recorded
- Ignores price-level changes (inflation)
- Based on historical cost
- Personal biases possible in valuation
- Ignores qualitative elements (e.g., employee satisfaction)
🔶 Basic Terms in Accounting:
| Term | Meaning |
|---|---|
| Transaction | An economic activity between two parties measurable in money |
| Assets | Valuable resources (e.g., cash, land, machinery) |
| Liabilities | Obligations payable by the business (e.g., loans, creditors) |
| Capital | Owner’s investment in the business |
| Drawings | Withdrawal of cash/goods by owner for personal use |
| Debtors | Persons who owe money to the business |
| Creditors | Persons to whom business owes money |
| Revenue | Inflow from regular business activities (sales, rent received) |
| Expenses | Costs incurred to earn revenue (wages, rent, electricity) |
| Profit | Excess of revenue over expenses |
| Loss | Excess of expenses over revenue |
| Goods | Items bought for resale (for trading business) |
| Purchases | Buying of goods |
| Sales | Selling of goods |
| Stock | Unsold goods |
| Voucher | Documentary evidence of a transaction |
🔶 Types of Accounting:
- Financial Accounting – Recording & reporting of business transactions.
- Cost Accounting – Determining the cost of production.
- Management Accounting – Providing information to management for planning.
🔶 Accounting Process (Cycle):
- Recording → Journal
- Classifying → Ledger
- Summarising → Trial Balance
- Reporting → Final Accounts
- Interpreting → Analysis for decision-making
🔶 Branches of Accounting:
- Financial Accounting
- Cost Accounting
- Management Accounting
- Tax Accounting
- Social Responsibility Accounting
🔶 Users of Accounting Information:
1. Internal Users:
- Owners
- Management
- Employees
2. External Users:
- Investors
- Creditors
- Government
- Tax authorities
- Customers
🔶 Qualitative Characteristics of Accounting Information:
| Characteristic | Description |
|---|---|
| Reliability | Free from error and bias |
| Relevance | Influences economic decisions |
| Understandability | Easily comprehensible to users |
| Comparability | Can be compared with previous periods or other firms |
🔶 Accounting Principles:
- Accounting Concepts – Basic assumptions (e.g., Going Concern, Money Measurement)
- Accounting Conventions – Customs used (e.g., Conservatism, Materiality)
🔶 Accounting Standards (AS):
- Set by the ICAI (Institute of Chartered Accountants of India)
- Ensure uniformity and transparency
- Some examples:
- AS-1: Disclosure of Accounting Policies
- AS-9: Revenue Recognition
🔶 Systems of Accounting:
- Cash System – Transactions recorded only when cash is received or paid.
- Accrual System – Transactions recorded when they occur, irrespective of cash flow. (Widely accepted)
🔶 Basis of Accounting:
- Cash Basis: Revenues/expenses when cash changes hands
- Accrual Basis: Revenues/expenses when they are earned/incurred
🔶 Accounting Equation:
Assets = Liabilities + Capital
This is the foundation of double-entry accounting.
🔶 Bookkeeping vs Accounting:
| Basis | Bookkeeping | Accounting |
|---|---|---|
| Scope | Narrow | Broad |
| Objective | Record transactions | Analyse and interpret data |
| Skills Required | Clerical | Analytical and conceptual |
| Decision-making | Not used | Used for decisions |